S&P warns on parliament gridlock


Australia’s AAA credit rating remains under threat from continued parliamentary gridlock, ratings agency Standard & Poor’s has warned, despite maintaining the rating with a stable outlook.

S&P today affirmed the credit rating, noting the country’s wealthy, resilient economy, strong institutional settings and monetary and fiscal policy flexibility, but said that it could lower the ratings if Australia’s budgetary performance did not improve broadly as it currently expects.

“Continued parliamentary gridlock on the budget could trigger this scenario,” the agency said.

“Still, we continue to believe that there is political and community consensus for prudent management of public finances,” S&P said, adding that the current impasse on some budget measures reflected a disagreement on how these measures should be achieved.

Although the ratings agency said Australia had low levels of debt and deficits, it noted that the Senate had blocked a number of the Abbott Government’s attempts to adjust spending on “politically sensitive” areas such as pensions, health and eduction and welfare.

The ratings agency said Australia’s high levels of household and external debt, and vulnerability to weakening commodity demand, moderated the strength of the Australian economy, which it forecast to grow at an average GDP per capita rate of just under 3 per cent between 2015 and 2018

The ratings agency said it was concerned by subdued economic growth, as drivers of growth rotated away from mining investment to non-mining sectors. Mining investment peaked in mid-2012 after the commodities price boom, and has since continued to shrink.

Australia’s falling terms of trade — thanks to a sharp decline in key commodity prices such as iron ore — were also dampening income growth, S&P said.

“Mining investment continues to decline from very high levels, weighing on growth. On the other hand, commodity export volumes are rising strongly as mining and energy projects come on line, supporting the country’s economic performance,” the ratings agency said in a statement today.

“Dwelling investment, too, is increasing, driven by low interest rates and strong population growth, but other sources of domestic demand remain subdued.”

The Reserve Bank of Australia has cut the official interest rate to a record-low level of 2 per cent as it attempts to stimulate the economy away from the mining boom.

However, S&P said Australia’s key credit weakness was the high level of external debt.

“The banking system in particular has a high degree of external indebtedness and relies on the ongoing backing of foreign investors,” S&P said, estimating that Australia’s net external debt was nearly 270 per cent of current account receipts at the end of the 2014 financial year.

But the ratings agency said Australia’s major banks were still highly creditworthy, despite the reliance on external funding, and Australia’s public finances remained strong, with low levels of debt and deficits.

S&P was confident Australia was able to absorb large economic and financial shocks, as was demonstrated during the global financial crisis in 2009. The outlook for Australia’s credit rating remained stable, based on the expectation that conservative budgetary policies will narrow budget deficits over the forecast horizon.


[“source – .couriermail.com.au”]